Alert: Fed to Partially Sterilize Next Monday's QE2 Purchases

As we noted on November 10, there will be an unprecedented two Treasury permanent open market operations (POMO) by the NY Federal Reserve on Monday, November 29, 2010. One will be conducted in the morning for $1.5 to $2.5 billion with another in the afternoon for $6 to $8 billion.

A new twist has developed, however, as only minutes ago, the Fed announced $5 billion in 28 day term deposits (Fed Bills) will be auctioned the very same day. This will have the effect of sterilizing 2/3 to 1/2 of Monday's money printing.

Does this signal a shift in Fed policy? Perhaps a token gesture to China and others that have criticized and characterized Bernanke's moves as blatant inflationary debt monetization? Not necessarily, as the last such TDF auction was conducted on October 4, with the same maturity and offering amount. We will, however, monitor these auctions with a keen eye going forward.